Guide to Socially Responsible Investing

By

Nicole Sara Sivens

April 25, 2018

15 min read

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When diving into socially responsible and ethical investing, it can be tough to navigate the terms and ideas that are tossed around. Impact Investing creates an intentional selection of holdings with a keen eye toward progress.

Socially responsible investing (SRI) essentially filters out the companies involved in harming our planet and our health or that people find morally objectionable, while including companies involved in sustaining our ecosystem.

Socially responsible investing is one of several related concepts and approaches that influence and, in some cases govern, how asset managers invest portfolios.The term "socially responsible investing" sometimes narrowly refers to practices that seek to avoid harm by screening companies included in an investment portfolio. However, the term is also used more broadly to include more proactive practices such as impact investing, shareholder advocacy, and community investing.

The history of SRI

Socially Responsible Investing has been around for as long as people have been investing money and voting with their dollars. Interestingly, financial trends tend to mimic the political and social climate of its time.

Perhaps the most notable case happened during the Vietnam War. The famous picture of a young girl running towards a photographer screaming, her back burning from the napalm dropped on her village, channeled outrage. Dow Chemical, the manufacturer of napalm, was the target of protests across the country – and in the boardroom. Investors chose to vote with their dollars and divest from funds supporting Dow Chemical unless they changed their practices.

And so, while investors in previous generations were focused on women's rights and civil rights, modern ethical investors have added the planet to the list of concerns.

What SRI does

In accordance with X of the United Nations’ Sustainable Development Goals, socially responsible investing has trended toward companies that positively impact the environment by reducing emissions or investing in sustainable or clean energy sources. Conversely, socially responsible investments avoid industries like coal mining and weapons manufacturing because of the negative impact of their business practices.

What SRI doesn’t do

Socially Responsible Investing does not take into consideration the overall insight into company practices when considering inclusion. That broader, richer, qualifiable knowledge is more reserved for the ESG level of Impact Investing.

What role does SRI play in how Swell chooses its stocks?

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We ask: In the face of finite environmental resources and the health issues relating to the mismanagement of those resources, which companies stand to benefit financially by producing the necessary goods and services we need to sustain the planet and ourselves?

Of those companies, which ones are doing their best to produce these goods and services in ways that do as little damage to the environment and human health as possible?

In a nutshell, that’s how we make our selections.

The criteria we use to answer these questions are often industry- and sector-specific – this is because impact issues are often are as well. Plus, each business has unique features that must also be taken into consideration. That being said, there are some general qualitative impact criteria that are consistent across all of our portfolio companies.

Evidence of commitment to United Nations Sustainable Development Goals

Companies in our portfolio have either declared that they are tying their revenue generation activities toward achieving the UN SDGs, or, they do so by virtue of the nature of their businesses.

Thematic Revenue

Companies must derive revenue from products and services related to the portfolio theme or by virtue of their supply chain. For example, a healthcare technology company that uses closed-loop manufacturing processes at its facilities may be eligible for inclusion in the Zero Waste portfolio. This is another important feature for achieving sector diversification while maintaining the impact theme mandate.

Evidence that a materiality matrix drives company investments

Companies in our portfolios have an awareness of what their key environmental, social, and governance risks are, and are working to improve them through strategic investments that are likely to experience profit growth over the long term. Companies that make sustained positive impact performance improvements remain in the portfolio.

Reporting best practices

The companies in our portfolios report on strategic initiatives using an agreed upon framework laid out by the Global Reporting Initiative, the Sustainability Accounting Standards Board, or the International Integrated Reporting Council. Many of our portfolio companies have signed onto the UN Global Compact and similar initiatives.

Who keeps an eye on the companies?

Swell Investing is uncompromisingly selective. We do our due diligence to determine whether the companies in our portfolios are doing well financially in addition to their positive social impact. We believe our portfolios are made up of the companies that are the cream of the crop.

We also understand that companies are not infallible and that businesses face consequences that affect their financial performance and/or reputation. When this occurs, we do a prompt assessment of the nature and severity of the situation and monitor the company’s responses – and the responses of other relevant stakeholders.

A recent example of this was a major health and beauty company. They were removed from our Disease Eradication portfolio when it was brought to light that they weren’t forthcoming with the knowledge that some of their baby products were cancer-causing.

Their removal was not simply because their products were found to be cancer-causing, which resulted in lawsuits; instead, they were removed from the portfolio because they deliberately obfuscated the facts and risks to public health and safety. This is a significant violation of the social compact and calls into question their social license to operate.

The impact team also engages with these parties directly as needed. The information collected is used to determine what, if any, investment action is taken.

Do you have to sacrifice returns to practice SRI?

Not at all. You absolutely can make an impact without sacrificing returns. The MSCI KLD 400 Social Index is comprised of companies with high ESG ratings and avoids companies incompatible with specific values-based criteria. This index, which is the oldest ESG index in the US, has shown that ESG can create added value – by outperforming the S&P 500 for the last 27 years.

We believe we're identifying market opportunities, and therefore, you're not sacrificing returns when you invest in impact. You absolutely can combine purpose and profit.

This website is operated by Swell Investing LLC, an SEC Registered Investment Adviser. Brokerage services provided to clients of Swell Investing LLC by Folio Investments, Inc., an SEC registered broker-dealer and member FINRA/SIPC. Investments: Not FDIC Insured • No Bank Guarantee • May Lose Value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Please consider your objectives and Swell’s fees before investing. Past performance does not guarantee future results. Investment outcomes and projections are hypothetical in nature. Not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Swell is not registered. Friede, Gunnar, Timo Busch & Alexander Bassen. "ESG and financial performance: aggregated evidence from more than 2000 empirical studies." Journal of Sustainable Finance & Investment, vol. 5, no. 4, 15 Oct. 2015, pp 210-233. https://doi.org/10.1080/20430795.2015.1118917. "S&P 500" is an abbreviation for the Standard & Poor's 500 Total Return Index, a market-value weighted index of 500 stocks chosen to reflect the risk/return characteristics of the large cap universe and one of the common benchmarks for the US stock market. The MSCI KLD 400 Social Index comprises companies with high Environmental, Social and Governance (ESG) ratings and excludes companies involved in Alcohol, Gambling, Tobacco, Military Weapons, Civilian Firearms, Nuclear Power, Adult Entertainment, and Genetically Modified Organisms (GMO). The Index aims to serve as a benchmark for investors whose objectives include owning companies with very high ESG ratings and avoiding companies that are incompatible with specific values-based criteria. Comparison to the S&P 500 Index and MSCI KLD 400 is shown for illustrative purposes only. Swell's portfolios differ from these benchmarks in that, among other factors, Swell's portfolios are managed, primarily comprised of small and mid cap stocks, are not diversified, bear fees, and may vary materially in volatility. Past performance is not indicative of future results.

The Swell Impact 400 is not a market index, is not based on any market index, and does not track any market index. At inception, the Swell Impact 400 contains 400 securities; however, the number of securities may vary over time based on market conditions, corporate actions, and other factors, including eligibility factors and limitations in security selection and portfolio construction. Any reference to "Impact 400" shall mean the "Swell Impact 400".